Policy Innovations Digital Magazine (2006-2016): Briefings: Northeast Puts on the Carbon Cap

For the first time, a carbon market is opening for business in the United States. The long-awaited Regional Greenhouse Gas Initiative (RGGI), takes effect on January 1, 2009. Utilities in ten states—Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont—will be required to purchase carbon emission rights or find themselves unable to operate.

The RGGI, known as Reggie, dates to 2003. New York's then-governor, George Pataki, invited neighboring states to participate in a regional cap-and-trade system. At the time, the European Union (EU) was alone in crafting an Emissions Trading Scheme (ETS). Seeing climate change as an opportunity for leadership, the EU implemented the recommendations of the Kyoto Protocol, setting ambitious targets for emissions reductions.

Early glitches in the system, such as the over-allocation of free credits, led some skeptics to declare that cap and trade was dead and buried. The new initiative addresses some of these shortcomings. By auctioning off allowances and including all qualified private-sector participants, Reggie seeks a viable emissions market from the get-go.

Whether the market actually emerges, however, is uncertain. Critics have noted that even without an EU-style giveaway, Reggie faces an over-allocation problem—more credits will go on sale than are necessary to cover current emissions. RGGI carbon futures contracts selling on the Chicago Climate Exchange have declined in price by nearly 20 percent since they were first issued earlier this year.

One nearby state, Pennsylvania, has opted out entirely, leading some to question Reggie's long-run viability. With an economy and population roughly half that of New York, Pennsylvania emits more than twice as much CO2. It is also home to four of the top fifty dirtiest power plants in the country (none are to be found in the RGGI states), and hosts twice as much coal-fired generating capacity as the ten states combined.

The Northeast has some of the highest electricity prices in the nation already, and business groups are concerned about manufacturers moving elsewhere, taking jobs with them. Concerns also abound that utilities will shift generating capacity to plants in Pennsylvania, a phenomenon referred to as "emissions leakage."

"Pennsylvania benefits from being outside the system," said Jennifer Kramer of New Jersey-based utility PSEG in a recent interview with Policy Innovations. "The lack of a national program penalizes producers in the region by skewing the playing field in favor of polluting coal-powered generators to the west."

Because of its proximity to Pennsylvania, New Jersey is more vulnerable to leakage than other states in the region. A recently passed state law requires the New Jersey Board of Public Utilities to find a remedy for the leakage problem; Maryland and Delaware have both adopted measures meant to protect their utilities by allocating some emissions credits directly to the generators if carbon prices spike beyond a certain threshold.

But not everyone is worried. "The cap is so modest, and because transmission limitations will keep electricity imports from growing too fast, I don't see much opportunity for leakage," said Dale Bryk, of the Natural Resources Defense Council. Nevertheless, she acknowledged, lawmakers in the region are worried.

The electricity industry anticipates the emergence of a federal cap-and-trade system in the near future. Some utilities are already factoring this into their planning decisions. The possibility that Reggie may become simply a stepping-stone on the way to a nation-wide scheme provides a further disincentive for utilities to move capacity out of state.

"We need a full-economy approach," said Brent Dorsey of Entergy, a utility with significant nuclear-generating capacity in the Northeast. "And it should be a technology-agnostic approach. We hope to see RGGI extended to the whole country."

A mere three weeks after Reggie comes into effect, a new president will be sworn in. Both candidates have expressed a commitment to reducing greenhouse gas emissions, and each has supported cap and trade. With California in the lead, some Western states and Canadian provinces are already developing their own scheme, which will include a provision for emissions trading with RGGI.

While Reggie may experience some growing pains, its success is sure to give electricity producers and consumers in the northeast a competitive advantage in the future.

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